With China’s post-Covid recovery proceeding at a slower-than-anticipated pace and investors unsettled by broader macroeconomic uncertainty, Fidelity International’s Portfolio Manager, Anthony Srom, demonstrates the value of active stock picking with an overview of the current environment in Asia.
“We remain cautiously active buyers in China. The team’s core stock-picking approach, underpinned by Fidelity’s on-the-ground analytical presence, still allows us to generate alpha for our portfolios,” says Srom. Using China’s internet segment as an example, he explains that the market is overly focused on a few leading household names that have become potential value traps. At the same time, lower-profile media companies are generating more substantial advertising revenue and delivering higher profit margins. Yet, their valuations are still lower than the big players.
There have been well-documented issues in the construction and development segments of China's property sector. As a result, people looking to upsize their homes are turning to the secondary market instead. “When homeowners upgrade, there is a natural desire to decorate or refurbish the property,” notes Srom. Therefore, the team sees opportunities in companies that manufacture building materials, such as waterproofing and paints. This example shows how active stock selection can deliver results even within a problematic sector.
Capacity discipline provides a solid foundation for technology investment
Turning to the technology sector, particularly those key players outside China, Srom points out, “Markets are always challenging, but it's just particularly challenging at the moment.” Yet, there are company-specific opportunities, particularly in the technology hardware space, with positive sentiment towards semiconductor manufacturers. “If we look at our investment process revolving around fundamentals, sentiment, and valuation, then we identified that technology was depressed in the second half of 2022 and the early stages of 2023,” he explains. “Then artificial intelligence providers suddenly appeared, boosting the narrative around technology hardware in Asia.”
Yet, this upturn is not wholly sentiment driven, as the structural drivers underpinning Asia’s technology sector, such as solid capacity discipline – particularly in the memory segment – are robust. “In the short term, I don't believe a recession is likely to derail our thesis,” adds Srom. He does think that the market could become too exuberant and start to overvalue companies. At the same time, the team is also mindful of knee-jerk reactions to geopolitical events.
Seeking value in an expensive market
India is another market not to shy away from for investors in Asia. Indeed, macroeconomic news flow is positive, and the country’s economy is being boosted by favourable demographics. In this case, Srom again pays close attention to the team’s assessment of a company’s fundamentals, sentiment and valuation and finds that many share prices are overly expensive. This process, however, does pinpoint emerging opportunities across India’s regional banks and information technology services providers that are in a solid position to outperform. “These segments aside, the fundamentals of businesses across the board in India must improve to justify their elevated valuations,” explains Srom.
A future view of Korea
Given its significant technology-related profile, Korea is very sentiment-driven and thematic-driven at the moment. But outside of the tech segment and defence-related concepts that the market is focused on, pockets of largely neglected, domestic-oriented companies are starting to look attractive following substantial de-ratings in the past 12 to 18 months. Some leading domestic internet platforms are also in scope, given their valuation has troughed, and the team can see attractive upside going forward.
Less can be more
These select examples reinforce our view that active management is crucial given the current market conditions. Srom is also keen to underline that there’s a perception that a concentrated portfolio carries more risk. But that’s not necessarily the case if the fewer stocks held are carefully chosen. “Ultimately, we work hard to identify the ideas in the region that we believe can deliver relative outperformance to investors,” he concludes.
